Prices in U.S. Broadband Services

Between 2004 and 2009, as U.S. computer users were switching from dial-up Internet service to faster broadband service, the price of broadband declined anywhere from 3 percent to 10 percent, even after adjusting for quality. That was faster than the declines reflected in Internet pricing data from the U.S. Bureau of Labor Statistics, but was decidedly modest compared with the rapid price decline in electronic hardware during that period, according to researchers Shane Greenstein and Ryan McDevitt.

In Evidence of a Modest Price Decline in U.S. Broadband Services (NBER Working Paper No. 16166), they note that despite the rapid growth in adoption and revenue in broadband over the period they examine, there was no dramatic price decline after adoption. They further show that this market looks nothing like other types of electronics -- such as CPUs, lap tops, printers, or storage devices -- where the quality-adjusted price declines regularly exceed double digits each year.

The authors analyze more than 1,500 service contracts offered by DSL and cable providers in the United States. In their sample of prices from 2004, the average cost of cable was almost $49 per month; DSL was $58. Cable prices dipped in subsequent years but, on average, were higher in 2009 than in 2004. DSL prices did not change much in their sample.

When the authors adjust for quality, they find that cable prices declined 14 percent over the period, while DSL prices fell 6 percent. That works out to a savings of about $6.85 and $3.50 per month, respectively. Factoring in inflation, they conclude that real prices may have declined nearly 5 percent per year.

-- Laurent Belsie

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